Money Market Funds vs. FDIC and SIPC. Are Any of Them Safe?

*Updated July 10, 2024. 

Dear Natalie,
I had a session with you, and you said to make sure my cash accounts were FDIC-insured. I found out that several of my accounts are covered by SPIC (or is it PIDC?), which my broker said was better because it will cover up to $500,000 in cash and covers stock and bond losses up to $250,000. Seems like a better deal than FDIC. Would you agree? Signed, The Acronyms Are Confusing 
 
 
Dear Acronym Sleuth,
 
We’d all love to put our accounts with a brokerage that covers stock losses! However, sadly, that’s a pretty big misrepresentation of what SIPC insurance covers. That is why it is so important to read the fine print, and not just trust what the broker-salesman tells you. Have you ever heard the joke, “What do you call the person who got Cs in medical school?” (Doctor.)
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Below is a general breakdown of the protections offered by the various acronyms. Consult the fine print of your personal bank or brokerage agreement to know exactly what your brokerage does and does not offer.
 
FDIC-Insured. The Federal Deposit Insurance Corporation is an independent federal agency that insures cash held in FDIC-insured banks. Many FDIC-insured brokerages and banks now offer a bank sweep program where you can actually be insured above the $250,000 maximum individual coverage. For instance, my brokerage offers FDIC coverage up to $500,000 for individuals and $1,000,000 for joint accounts. Federally-insured cash is considered to be the safest way to hold cash. In 2021, you’re not getting paid to save, but at least it is insured up to the limits. Remember that FDIC doesn't cover failed brokerages, only if the bank fails.

SIPC-Insured. The Securities Investor Protection Corporation is a nonprofit corporation that helps investors when their brokerage fails. The SIPC is backed by assets of about $5.0 billion, with an additional $2.5 billion line of credit with the U.S. Treasury. (Sadly, yes, that’s billion with a b, not trillions with a t.) The fund ensures against brokerage default (not stock losses). So, if you have the misfortune of investing with Bernie Madoff (fraud) or MF Global (bankruptcy), then the SIPC is the firm that will try to recover as many of the securities as possible to distribute to the victim investors.
 
FYI: Most of Madoff’s clients were invested for years, thinking they were earning 12% annualized and compounding. So, even though the SIPC trustee boasts of returning almost 71% of the "allowed claim credit" (money stolen ) in the Madoff Ponzi scheme (after 12 years), it is a much smaller amount than most investors believed they were owed. One more important clarification: the SIPC cash coverage is limited to $250,000 (not $500,000).

Money Market Funds. Money market funds are not guaranteed by the government or by any bank. It is possible to lose money in a money market fund. There can be hidden charges and expenses. Under certain circumstances, the money market fund can impose liquidity fees (in other words, charge you to access your money. If the fund really gets into trouble and has to liquidate, redemptions will be suspended. Some funds came close to the thresholds when liquidity fees and redemption gates might have been imposed in March of 2020, which exacerbated the dash for cash. Additionally, when calculating your yield, be sure to subtract the fees. 
 
Is There Any Risk in a Money Market Fund? In 2023, the Treasury Department, Securities and Exchange Commission and the Financial Stability Oversight Council reformed the rules on Money Market Funds (again). In the early days of the 2020 pandemic, MMFs were stressed from rapid redemptions. Treasuries and bonds were also illiquid. On March 23, 2020, the Federal Reserve Board rescued MMFs, Treasuries, Mortgage-Backed Securities, bonds and select bond funds. A Money Market Fund Liquidity Facility with $10 billion of credit protection was established. The markets have stabilized today, however, the Feds want investors to understand that “MMF investors, rather than taxpayers, bear market risks.” They also want to incentivize and enable the fund companies to handle stress without relying upon government support. According to the Report from the President’s Working Group issued in December of 2020, the government “has repeatedly provided emergency liquidity to prime and tax-exempt funds and also has obscured the risks of liquidity and credit shocks for MMFs.”
 
In July of 2024, MMFs were offering a competitive yield of a little over 5%. In your retirement fund, you don’t have an option to invest in FDIC-insured cash. So, many people with a 401K are locked into money market funds, with the hope that at least MMFs won’t be as volatile as bonds or stocks. There may be a short-term Treasury Bill fund that might offer a similar yield with slightly lower risks. If you are over 59 ½, or if you have left 401Ks at previous employers, you should be able to roll-over your 401Ks into self-directed IRAs at a brokerage that does offer FDIC-insurance and perhaps even bank Certificates of Deposit for the cash portion of your portfolio.

Money Under Your Mattress. There’s an old joke in my family that someone buried their cash during the Great Depression, and the chickens dug it up and ate it! Keeping cash on hand is very risky. Wolves, thieves and chickens abound.
 
Bottom Line
So, what is safe in a world where bonds and money market funds are losing money, and you have to be careful about the acronym you choose for your cash account? In today’s world of very high-leverage (a lot of debt), getting a decent yield without losing principal is tricky, but doable. FDIC-insured cash is just the first step in a two or three-step process to make sure that you protect your assets and are positioned to earn an income on your wealth in the years to come. Protecting your assets is so important today that I spend one full day on this topic at my Investor Educational Retreats. Call 310-430-2397 or email [email protected] to learn more now. You can read testimonials, and learn the 15+ life math tools that you’ll learn and master, on the retreat flyers on the home page at NataliePace.com.
 
Don't be caught unaware. Don't be complacent. Don't rely upon others to do it for you. It's time to know what you own and be the boss of your money. 

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Join us for our Oct. 18-20 2024 Financial Empowerment Retreat. (Click to learn more.) In 3 days, you'll learn what's safe in a Debt World, how to make a smart investment in real estate, pick hot funds and companies (like crypto, cannabis and our 2021 Company of the Year), and how to incorporate hard assets and safe havens into a well-diversified wealth plan. You'll discover how to protect your wealth and save thousands annually in your budget with smarter big-ticket choices. The retreat is a complete Money Makeover that will transform your life forever. Bring your friends, family and teens for an unbelievably low group rate. Call 310-430-2397 or email [email protected] to learn more now. Register by June 13, 2021 (Sunday) to receive the lowest price and a complimentary, private, prosperity coaching session (value $300). 

Natalie Pace Financial Empowerment Retreat. Oct. 9-11, 2021. Call 310-430-2397 or email [email protected] to learn more. Receive the best price and a complimentary private prosperity coaching session (value $300) when you register by Sunday, June 13, 2021.

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Important Disclaimers
Please note: Natalie Pace does not act or operate like a broker. She reports on financial news, and is one of the most trusted sources of financial literacy, education and forensic analysis in the world. Natalie Pace educates and informs individual investors to give investors a competitive edge in their personal decision-making. Any publicly traded companies or funds mentioned by Natalie Pace are not intended to be buy or sell recommendations.

ALWAYS do your research and consult an experienced, reputable financial professional before buying or selling any security, and consider your long-term goals and strategies. Investors should NOT be all in on any asset class or individual stocks. Your retirement plan should reflect a diversified strategy, which has been designed with the assistance of a financial professional who is familiar with your goals, risk tolerance, tax needs and more. The "trading" portion of your portfolio should be a very small part of your investment strategy, and the amount of money you invest into individual companies should never be greater than your experience, wisdom, knowledge and patience.  

Information has been obtained from sources believed to be reliable. However, NataliePace.com does not warrant its completeness or accuracy. Opinions constitute our judgment as of the date of this publication and are subject to change without notice. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. Securities, financial instruments or strategies mentioned herein may not be suitable for all investors.
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About Natalie Pace
Natalie Wynne Pace is an Advocate for Sustainability, Financial Literacy & Women's Empowerment. She has been ranked as a No. 1 stock picker, above over 835 A-list pundits, by an independent tracking agency (TipsTraders). The ABCs of Money remained at or near the #1 Investing Basics e-book on Amazon for over 3 years (in its vertical), with over 120,000 downloads and a mean 5-star ranking. The 4th edition of The ABCs of Money was released on October 17, 2020. 

Natalie Pace's easy as a pie chart nest egg strategies earned gains in the last two recessions and have outperformed the bull markets in between. That is why her Investor Educational Retreats, books and private coaching are enthusiastically recommended by Nobel Prize winning economist Gary S. Becker, TD AMERITRADE chairman Joe Moglia, Kay Koplovitz and many Main Street investors who have transformed their lives using her Thrive Budget and investing strategies. Click to view a video testimonial from Nilo Bolden. ​

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